Mahler, Inc., applies manufacturing overhead at the rate of $40 per machine hour. Budgeted machine hours for the current period were anticipated to be 120,000; however, a lengthy strike resulted in actual machine hours being worked of only 90,000. Budgeted and actual manufacturing overhead figures for the year were $4,800,000 and $4,180,000, respectively. On the basis of this information, the company's year-end overhead was:
A) overapplied by $580,000.
B) underapplied by $580,000.
C) overapplied by $1,200,000.
D) underapplied by $1,200,000.
E) underapplied by $900,000.

Question

Quizplus · Accepted Answer

The predetermined overhead rate is calculated as follows:
Predetermined overhead rate = Budgeted overhead cost ÷ Budgeted machine hours
Predetermined overhead rate = $4,800,000 ÷ 120,000 = $40 per machine hour

Actual manufacturing overhead cost = Actual machine hours worked × Predetermined overhead rate
Actual manufacturing overhead cost = 90,000 × $40 = $3,600,000

The company's actual overhead cost was $4,180,000, so there was an underapplication of overhead cost:
Underapplied overhead cost = Actual overhead cost − Applied overhead cost
Underapplied overhead cost = $4,180,000 − $3,600,000 = $580,000

Therefore, the answer is B) underapplied by $580,000.